BRUSSELS The EU's top finance regulator has called for any European banking union to stretch beyond the confines of the euro zone and be policed by the EU's main financial watchdog, putting him at odds with Franco-German wishes for a bigger European Central Bank role.
Centralized monitoring of Europe's biggest banks is critical to establishing a joint European response to the problems of the region's lenders, such as those that are set to force Spain to seek international aid.
EU leaders will discuss this and other elements of a banking union when they meet on June 28 and 29. Such a union could also pool country funds to protect deposits and close down banks.
Michel Barnier, the European commissioner in charge of writing financial regulation, said supervision of lenders in a banking union should be done across all EU countries rather than just the euro zone, making it sensible to give the European Banking Authority (EBA) this role.
He is concerned that a scaled-down banking union could undermine the EU single market in financial services, but he faces considerable obstacles in introducing a scheme across all 27 EU member states.
"Following the logic that this banking union is important for the 27 countries, it would be logical that extra supervisory powers are given to the EBA, which we created for the single market," Barnier told Reuters in an interview.
"The ECB is part of the EBA. If not all 27 countries want to take this step, you could have a special committee created within the EBA with the presence of the ECB. That would be coherent."
The EBA was set up at the start of last year to bolster supervision of banks, but it has few powers.
Barnier will find it hard to win backing to strengthen the EBA after its stress tests last year failed to uncover the full extent of problems at Spanish lenders.
German Chancellor Angela Merkel recently signaled her support for giving the ECB a "tougher, stronger role".
French President Francois Hollande also believes that the ECB rather than the London-based agency should get the job of policing big banks in the euro zone, according to senior officials in Paris.
Those officials believe tackling banking problems in the euro zone must take priority, while Germany clashed with the EBA over last year's bank stress tests.
A further hurdle is posed by Britain, which has said it will not join any banking union. Its big international banks with operations in the euro zone may nonetheless be affected.
Barnier defended the EU banks agency. "The EBA is a young authority," he said. "They do good work with limited means and within the constraints imposed by the rules in place."
The agency depends for funding on the EU budget of pooled country funds, administered by the European Commission. Its resources are dwarfed by the ECB's annual budget - earned on the central bank's capital - which approaches 450 million euros.
"If we take further steps with the banking union, you will have to have changes to the organization of the EBA and how it works," said Barnier. "All this can evolve."
The former French foreign minister also said that the creation of an EU authority to wind down banks was possible, but did not say if this was also a role for the EBA.
"You can pool deposit guarantee funds. You can pool bank resolution funds," he said. "You can possibly create a European bank resolution authority. The door is not closed on any of those possibilities."
Britain wants to defend its autonomy in controlling financial services and fought to reduce the powers of the EBA before it was opened. London now believes oversight in a banking union should be limited to the euro zone and done by the ECB.
Barnier conceded that there may not be sufficient support for a banking union across all countries in the European Union.
"This supervision enhancement and mutualisation of funds is necessary at the very least in the 17 countries in the euro and useful for the 27," he said.
"I could imagine that some countries will not be in agreement and that those countries could obtain an opt-out. But all these measures are in the interests of all countries."
(Reporting By John O'Donnell. Additional reporting by Daniel Flynn in Paris. Editing by Sebastian Moffett/Jeremy Gaunt)